Multisite subdomain Blog images upload and dont show

My multisite blogs are uploading images but they dont show on the site. The upload directory path is correct however the image path on the site is different. example below

correct path that I type out myself:
http://dummytest.prettygoodlabel.com/wp-content/blogs.dir/9/files/2012/01/hdbg.jpg

this is what is generated on the site after upload:
http://dummytest.prettygoodlabel.com/files/2012/01/hdbg.jpg

Based on what I have been reading on the interweb this is a common issue noobs have. I've checked my .htacess and it checks out as far as I know, you can find it below:

# BEGIN WordPress
<IfModule mod_rewrite.c>
RewriteEngine On
RewriteBase /
RewriteRule ^index\.php$ - [L]

# uploaded files
RewriteRule ^files/(.+) wp-includes/ms-files.php?file=$1 [L]

RewriteCond %{REQUEST_FILENAME} -f [OR]
RewriteCond %{REQUEST_FILENAME} -d
RewriteRule ^ - [L]
RewriteRule . index.php [L]
</IfModule>

# END WordPress